A general resource for employees and management alike, covering issues old and new in the law of Ontario employment relationships.

Friday, December 2, 2011

Changing Existing Terms of Employment

I recently had a searcher find my blog a search term to the effect of "Can my employer change the termination clause in my contract?"

Which is an interesting question, and covers a broader range of issues of contractual changes.

The first thing I want to highlight is that every employee has a contract. Even if there isn't a written contract, the very nature of the employment relationship is contractual. Without a written contract, there's an oral contract. Where certain terms aren't expressly set out, the common law will often read in implied terms. So when I talk about changing contractual terms, I am talking not only about modifying an existing written contract, but also about implementing a new written contract for an existing employee who didn't have to sign a contract in the first place.

I am often surprised by employers who come to me for advice on the dismissal of an employee, who never implemented a written contract with termination language. For some smaller and midsize employers, it's almost expected - they often can't be expected to realize the consequences of not having one, while knowing that implementing employment contracts will require them to spend money on lawyers. Small and mid-size employers often cut me off when I start talking about "notice" and say something to the effect of, "Yeah, we know all about that; we have to pay [up to] 8 weeks, right?" They are quite chagrined when I tell them No, that without a written contract limiting notice, they'll have to pay out on the basis of "reasonable notice", which can range in some cases as high as two years' salary (and higher in exceptional cases). But even larger employers often don't have such contracts, and these I would expect to know better.

This is why I say that "A stitch in time saves nine" is very true when dealing with employers and legal fees. Paying a lawyer at the outset for assistance in developing contracts and policies can seriously limit liabilities down the road. And legal fees - if you have to resist a wrongful dismissal action, you'll face the prospect of legal fees on such a scale that make the fees associated with contract drafting look like pocket change, even without considering the actual liabilities to the employee.

Can an Employer Unilaterally Change an Employment Contract?

Lawyers never give firm Yes or No answers. Law is kind of like science: "Yes, supposing that preconditions a, b, and c, are met, with a range of error of z%." So to a simple Yes or No question, I'm going to say "Sort of, but only if it's done right."

Let's suppose that you have a job. Maybe you started it twenty years ago, maybe you started last week, maybe you just accepted the offer and have a start date two weeks from now. Then your employer comes to you and says "Sign this contract". The contract affirms all of your other entitlements and responsibilities in all respects - salary, benefits, sick leave, job functions, reporting structure, etc. - and then you come to this "Termination" clause, saying that the employer is entitled to fire you on provision of x weeks notice (or maybe it's a formula, or maybe it's keyed to the Employment Standards Act minimums). You've never before agreed to such a term. Maybe you have an existing contract that doesn't have that term, or maybe you don't have an existing contract, and were never told that you'd be required to agree to such a term.

But your employer tells you to sign it, and you're worried about what might happen if you don't, so of course you sign it.

The answer is "Probably not". Such a contract runs into the problem of "lack of consideration" - you didn't get anything in return that you didn't already have for signing the contract, so it doesn't meet the legal definition of a contract.

But what if there is consideration? A small raise, a nominal bonus, a guarantee of a Christmas gift with a value of at least a peppercorn. Then that problem disappears. So if the employee signs it, there's a good chance that the contract can be relied upon.

Though that isn't a 'unilateral' change to the contract. The employee is agreeing to it. Perhaps the agreement feels forced, because the employee expects they might be fired if they refuse to accept it, but unless the contract is unconscionable or can be voided through other doctrines, then their agreement to it is binding.

What happens if the employee refuses to sign?

Well, the employer continues to be entitle to terminate at any time on notice in accordance with the existing contractual terms. Refusing to sign is not misconduct that will justify a termination for cause, but neither will it trigger any protection from termination. An employer is perfectly entitled to terminate on provision of notice in response to a refusal to agree to new contractual terms.

An employer has a limited entitlement to unilaterally change terms of the employment contract, but when we're talking about a termination clause, or significant changes to remuneration or job duties, that will often be beyond that. So strictly speaking, an employer isn't entitled to unilaterally impose new terms.

But the employer can give notice of termination, and offer new employment on different terms. This has to be done carefully, and may trigger certain liabilities...and if it's done wrong, may not work. In one case, an employer was trying to get out of a 'golden parachute' termination clause, and gave the employee two years notice that the clause was being changed, then fired the employee when he refused to accept the change two years later. On the facts of that case, the employer was found to have breached the contract and was required to pay out pursuant to the golden parachute clause. So it's tricky, and needs legal guidance to do properly.

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This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.